Public finance has always been a major point of discussion among various economic and political factions of nations. The nature and need of financial policies highly depend on the economic, social and historical context of the individual country along with global trends and external factors. It is one of the most significant determinants of the current governing body as well as an indicator of the financial and demographic makeup of the country.
However, as we move across different centuries, the broad umbrella of public finance has often changed its meaning. Rulers have used policies to fund years-long excavations. Nations have tried to eradicate poverty or generate new revenue streams. Organizations have propped up across the world to gain influence and change the way a country’s revenues, expenditures, and debts are managed.
For something with millennia of history, there is bound to have a few peculiarities, to say the least. Even the modern world is plagued with policies with unclear benefits, counter-productive impacts, and often unintended results. However, throughout the years, there have been a few models that stand out, those that sustained far longer than expected given their ludicrous nature. Let’s take a look at three such instances which left an immense impact on the nations, their coffers, and their citizens.
18th Century France was littered with conflicts, both on domestic and international fronts. The global struggle for supremacy with Britain resulting in Seven years’ war, was one of the costliest undertakings of the country. To sustain events on such a large scale, the French government decided on providing annuities to their citizens against a fixed payment. Citizens could opt into this by providing capital to the government and in turn receive annual payments for the rest of their lives. Citizens reduced their risk of uneven income for upcoming years which was already too volatile for a majority of the country and the government found one of the most popular public-finance schemes. This was also one of the earliest examples of government-mediated insurance. However, there was one fatal flaw in this policy, the annuity provided was kept constant for all age groups. So, young people could get the same amount for the rest of their lives as old people at a similar cost. The rationale behind equal annuities was that the population buying into this would have all age groups, thus averaging out the cost. However, citizens understood if their health condition would allow this to be profitable thus, a majority of people who signed up for this were young, leading to skewed customer demography.
By the end of the 18th century, this was proved to be a fiscal mess, although it was still one of the major revenue sources of the government. Eventually, the government backed out of this scheme, leading to tremendous discontent among citizens and affecting their financial health thus becoming one of the less quoted but extremely significant reasons for the French Revolution.
In 1834, the UK passed the Poor Law Amendment Act (PLAA 1834) often known as the New Poor Law, which sought to completely change the way poverty relief was provided to the citizens of the United Kingdom. Unlike its predecessor, the Poor Law of 1601, this law was based on the premise that the population would claim relief rather than seeking employment if left unchecked. The earlier law mandated local parishes to provide relief to the poor and disabled by providing cash, kind, or jobs. It was considered a natural deterrent to riots and necessary addition for maintaining peace in the society. However, the newer centrally managed workhouses would only provide relief if the person agreed to live in the workhouse which was subject to extremely harsh conditions. These workhouses were managed by local businessmen who often forced the workers to live in worse conditions than that of prisons with inadequate food, cramped up beds, no health facilities, and insanely long work hours. The government wanted to use workhouses as deterrents prohibiting people who were able to work to seek relief. This resulted in one of the harshest state-mandated treatment of populace in the history, inspiring authors like Charles Dickens to include grim tales of children and families in these workhouses in his novel “Oliver Twist”. Often cited as having worse conditions than that of slaves in the West Indies with separation of families and high mortality rate, this law didn’t reflect the economic prosperity the UK was gaining during the same period. This begs the question as to why such harsh and inhumane law was passed by the parliament and requires a brief insight into its predecessor and the broader system of government-funded relief.
The earlier version of the law is often cited to exist as a result of Queen Victoria’s comment after her nationwide tour “Paupers are everywhere” in the 16th century. Due to the industrial revolution and stricter privatization of land and resources, there was a huge shift in the economic structure of the country. Rather than letting workers organically migrate to areas with better economic opportunities owing to newly emerging industries, this law in effect tied down the labor force to local parishes, thus decreasing the free market flow and making them dependent on the local relief system resulting in harsher conditions for the poor in the long run. Arguments can be made that a free market would have allowed a better condition for workers, however, it requires a separate analysis, owing to the relatively new concepts of land, labour, and capital as a means of production in 16th and 17th century England.
Owing to this flawed relief system and its corrupted implementation, the UK faced a significant increase in local tax, burdened by the middle and upper classes. Widespread uproar in many rural areas because of increasing taxes and the growing number of people in need of relief led to the passing of the upheaval of the earlier system, resulting in a much harsher and equally less effective alternative.
The fundamental idea behind New Poor Act was to decrease the cost of poverty relief which led to local businessmen using the workhouses to act as profitable organizations at the cost of the poor and gave the idea of punishing the poor only because of their economic conditions. Although this was banned effectively in 1948, this government-funded workhouse scheme implemented for more than a century is still considered one of the major setbacks in public finance policies.
Pirates and Privateers
When we think of piracy, we often have a vivid image in our mind — Wild lawless cohorts pillaging and exploiting innocent merchants. However, for many centuries these groups served several other purposes. Governments of Europe and the United States have used pirates as an extended arm of their military for many centuries. They allotted a “Letter of marque” sanctioning private persons or ships to engage in maritime wars. These “officials” known as privateers were exempt from the laws against piracy. Unlike the naval seamen who got fixed wages from the government, privateers were employed on a commission-based model, meaning, the government took a certain percentage of the exploits and allowed the pirates to distribute the rest amongst themselves. This was used by the French, Spanish, Britain, and US governments ( a British colony in the earlier centuries) in between the 17th and 19th centuries. The Golden age of pirates (1650s to 1730s) witnessed ex-naval sailors turning to piracy for better economic prospects. Britain’s rise during the 1600s to 1800s was largely fueled with gold obtained by attacking Spanish ships of the high seas returning from the Americas and thus until 1856 sea piracy wasn’t just legal but was promoted by many European governments.
During the US- Britain war, privateers were promoted by the likes of Benjamin Franklin to subdue the influence of the mighty Royal Navy of Britain. The treasures obtained were used to sustain naval warfare and to subdue enemy influence in the sea. However, very often pirates and privateers were allowed to pillage more than just what was described in the “Letter of Marque” because of the lack of control of governments in the sea. Using private individuals with an often well-known criminal history as both a military and financial strategy shows various phases the established governments of the US and Europe have gone through to arrive at today’s unanimous position of State against “anti-social” elements considered as a threat against citizens and the country.
These descriptions are not meant as a critique of today’s governments but are intended to show the difference in the way financial policies have been constructed and their effects have been evaluated across centuries. These also serve as a reminder and a lesson of the widespread and unintended impact poorly made policies can have on the populace and the country.
- The Wisdom of Finance: Discovering Humanity in the World of Risk and Return — Mihir Desai
- Image credits: WikiArt.org